At the beginning of Alexander Elder’s best-selling book “Trading for a living”, he mentions the fact that many people ask him whether being a psychiatrist himself has helped him becoming a successful trader. While at the first moment the two professions look like they are world-apart, he carefully explains it how one is directly connected to each other and that if you lack either a good psychology foundation or skills, you won’t succeed as a trader in the stock market.
Both psychology and trading have one important aspect in common: they both deal and focus on reality; to see the world the way it really is and not in a molded way that would please our eyes. Have you ever discussed a stock chart with a friend? Aren’t you amazed on how different are your opinions? If you don’t have a close friend that is also a trader (or if you don’t have a friend at all!), you can go to the World Wide Web, download some charts that someone have talked about it and try to compare what you see to what they have written. You will be surprised.
This is the trader’s psychology playing tricks. Well, maybe not really tricks, but it is the investor’s psychology that is making you see the same stock chart in a completely different way than someone else. How many times have you molded a setup to a chart? “Well, the RSI here is not really where it should be, but there is this other super signal here that is giving me the heads up to go all in this trade.” This is a common phrase you might have said to yourself many times.
Then, guess what happens? You’re right: the trade goes against you and after, when checking what went wrong (which I really hope you do, always!), you are left wondering how on earth you could have thought that this was a good trade. All signals were there saying that this trade wasn’t a good one; but nonetheless, you ignore it all and pushed the button. That is the trader’s psychology at its best. You must be full prepared, mentally and physically, so that won’t happen again in the future.
Chris Sferatti is a proud contributing author and writes articles on several subjects. You can check out some other websites of his interest at Herniated Disc and Power Balance.